The White House's top economic adviser said yesterday that President Bush will insist that any Social Security legislation include a fix to the program's long-term financing problems, undercutting House leaders' efforts to craft a compromise that ignores the solvency question.
Ben S. Bernanke, the new chairman of Bush's Council of Economic Advisers, told reporters the president "will insist on maintaining the long-term solvency of the Social Security system, so that it can continue to provide benefits to retirees in the future."
Asked if a solvency fix was inviolable, Bernanke said yes.
The comments are significant because House Republican leaders have sided with conservatives who say Congress should settle for a modest plan to establish small private investment accounts financed from Social Security's temporary cash surplus. Under that plan, the House would drop efforts to close the gap between promised future benefits and anticipated tax revenue by cutting benefits or raising taxes.
The Senate Finance Committee, which was to take the lead on Bush's proposal, has been unable to move forward. At least one Republican member has opposed the establishment of private accounts carved out of Social Security tax revenue, but Senate conservatives have opposed suggestions that the committee move a Social Security solvency fix without such accounts.
To break the logjam, House leaders had hoped to move a modest accounts-only measure this fall. But Bernanke did not give them the green light.
"The president is committed to two elements," Bernanke said. "One is restoring the solvency of the Social Security system, and the second is creating personal retirement accounts for individuals. The legislative process is a long and complicated one, and we will be working with Congress to see what comes out, but we would want to see both of those elements in a final program."
Conservative economists were disappointed by the statement -- and somewhat skeptical.
"I don't think the White House is drawing any lines in the sand, these comments notwithstanding," said Rep. Paul Ryan (R-Wis.), a Ways and Means Committee member and proponent of the accounts proposal.
"If that's their position, they will be stubborn and this whole thing will go down," Lawrence A. Hunter, chief economist at the conservative Free Enterprise Fund, said of Bernanke's statements. "Solvency is dead on arrival."
Ryan and his allies had hoped the administration would back the House approach as a first step toward the overhaul of Social Security. White House National Economic Council Director Allan Hubbard appeared to accept that strategy last week on CNBC when he called the approach "a very important first step."
"The president very much supports it," Hubbard said. But Bernanke said firmly that he would recommend the president stick to his "basic principles" and oppose a plan that does not address the system's core problems.
Bernanke, a former member of the Federal Reserve Board, did suggest the White House is open to one change in the Bush proposal. Under the president's personal accounts plan, a retiree's defined Social Security benefits would be reduced by one dollar for every dollar contributed to an account, plus an interest rate of 3 percent above inflation. That so-called "offset rate" was set to roughly equal the amount the Social Security system would have received if the money in the accounts had instead gone to Social Security and been invested in Treasury bonds.
Under the plan, workers who choose personal accounts would get more benefits than they would from the traditional system only if their account investments returned gains higher than 3 percent above inflation. Even some allies of Bush have suggested that is too high a hurdle.
Bernanke appeared to agree.
"With real interest rates quite low, the offset rate may unduly penalize personal accounts," he said. "And we may need to think about whether the offset rate should be adjusted somehow to market levels."